* G20 leaders endorse G7, OECD agreements preparing way for higher US taxes, but politics has yet to weigh in;
* US Court of International Settlements gives plaintiffs preliminary win over Trump-Biden administration’s Section 301 tariffs;
* FOIA request forces release of a shoddy Section 232 report justifying auto tariffs on national security grounds that its authors were too embarrassed to publish.
The July 5th to July 11th, 2021 roundup of major trade developments, with L.C.
Treasury Secretary Janet Yellen and President Biden are beginning to realize that it would be premature to take a victory lap for the 15% global minimum corporate tax (“Pillar 2”) and digital services tax (DST, “Pillar 1”) agreements they wrested from the Group of Seven (G7), the OECD, and the Group of Twenty. The latest meeting was that of the G20 finance ministers and central bank governors in Venice, Italy, July 9th to 10th. Treasury Secretary Janet Yellen led the US delegation.
But domestic opposition to setting a global minimum corporate tax – which would make it easier to raise US taxes – and to abandoning large US companies to new taxes abroad has already been voiced in the US, mainly by Republicans,. Critics worry that the minimum tax agreement could provide a tax advantage to foreign companies and that the digital services taxes that discriminate against US companies might not be eliminated.
Crapo-Brady letter
In a July 8th letter to Yellen, Sen. Mike Crapo (R-ID) and Rep. Kevin Brady (R-TX), the top Republicans on the Senate Finance and House Ways & Means committees, warned that Congress won’t approve the international tax deal as it currently stands. Ranking Republican on the House Ways & Means Committee Kevin Brady (R-TX) called the deal “an economic surrender to China, Europe and the world that Congress will reject.”
The Crapo-Brady letter warned the White House not to enter a deal that renders US companies less competitive under the administration’s proposed doubling to 21% of the GILTI tax – “Global Intangible Low-Taxed Income” – the US minimum tax on profits made abroad. On the DST it said, “Congress has been open to a modest global profit allocation formula, applied neutrally to replace the patchwork of unilateral digital taxes that target Americans. Yet the proposed allocation formula would send up to 30% of companies’ global profits to so-called ‘market jurisdictions’.”
As Brady explained to reporters, “I think this is frankly years from being done, and I’m confident Congress will reject any tax agreement that advantages foreign companies… or surrenders a key part of America’s tax base that we’ll need… to pay for our government services going forward.” He said the White House’s push for an international tax deal is “an admission that the Biden tax rates will make America dramatically less competitive.” And on DSTs, he said some countries will still try to enact them in some form. “There are too many competing interests here,” Brady said, “for them to finalize a deal that would be agreeable to Congress.”
Also some internal EU opposition
There is also opposition within the EU, as low-tax countries Ireland, Hungary, and Estonia oppose the deal but are now under pressure from major EU countries to agree, especially high-tax France and Germany. And other countries are likely to face internal opposition even if leaders endorse the deal. Foreign leaders will be under pressure to demand exemptions from the tax minimum to keep domestic support.
Nonetheless, Yellen thinks Congress will go along. But that would require that all 50 Senate Democrats stay aboard. Already moderates like Sen. Joe Manchin (D-WV) have expressed concern about the international tax deal. Moreover, bringing the US into conformity with the deal on Pillar 1, the 15% global minimum corporate tax, could require a tax treaty, which would need a two-thirds vote for ratification in the Senate.
UK, China expecting carve-outs
In line with the concerns expressed by Brady, there has been a lot of discussion about countries being granted minimum-tax exemptions in free trade zones (FTZs) or for certain industries, such as shipping and (in the UK case) financial services, or for other entities that governments want to encourage. China indicated it is going along with the deal on the assumption it will get some carve-outs, such as for FTZs. Other countries are expected to demand their own exemptions. If there are too many, it will undercut the agreement and, some members of Congress fear, put US companies at an international disadvantage. Since details such as exemptions, along with other details, are yet to be worked out, the coming negotiations on details could be a minefield.
In other words, neither US support nor that of all the other countries needed to make the agreement work is assured. At minimum, the changes will take time to implement.
CIT favors plaintiffs litigating the Section 301 tariffs
The US Court of International Trade (CIT) issued a ruling on July 6th – a two-to-one split decision by the three-judge panel – siding with challengers to the Section 301 tariffs on China List 3 and List 4A goods.
This is the huge case with thousands of plaintiffs, now represented by a smaller group, that asked for a court injunction to prevent the government from finalizing the challenged tariffs. The plaintiffs argued that they could be irreparably harmed if their deposits for the duties were liquidated by the US Customs & Border Protection agency, to which they had been paid while the case has been going on.
Plaintiffs could be refunded Section 301 duties
The court agreed, and on July 6th it granted a preliminary injunction suspending liquidation of the duties so that they could be easily refunded if plaintiffs win the case. The Trump Section 301 duties were challenged by plaintiffs on the grounds that they were imposed on Lists 3 and 4A too long after the Section 301 investigation was completed; they should have been imposed within a year. This was not a challenge to the constitutionality of the duties but rather a technical issue regarding whether the statute’s timing requirements were adhered to.
Unsurprisingly, the protectionist-minded Biden administration took the side of the Trump administration, contending that the duties on these goods were simply a modification of the original duties that were imposed on other goods within the time frame allowed. The Biden administration showed again that it has no problem with unilaterally imposing tariffs. This week’s CIT ruling indicates that at least two of the judges believe the plaintiffs have a sufficiently strong case to warrant suspending some of the duties while the litigation continues.
Section 232 report: “Even the authors were too embarrassed…”
The US government finally released the Section 232 report claiming that imported autos and auto parts pose a national security threat. The report was done at the request of President Trump, but he refused to release it and didn’t take any of the actions against imports recommended in the report. Nonetheless, he kept the threat of auto tariffs alive, and wielded it to gain leverage against Japan and the EU. The report was completed in early 2019. The time has long passed during which a president could take action in response to it.
The White House may have reluctantly released it knowing it could undermine any future effort to impose tariffs on national security grounds if those grounds aren’t clearly justifiable. But the new president still hasn’t removed the old president’s Section 232 tariffs on steel and aluminum, at least not yet.
Some reports were released in timely fashion
The steel and aluminum 232 reports were released publicly when completed. While a slight improvement over the auto report, they too were generally seen as weak. The defense secretary and other US officials at the time disagreed that metal imports were a national security threat.
The auto report disgraced itself by complaining that imports were lowering prices for consumers. In other words, they were a threat to uncompetitive domestic companies, not national security. Nevertheless, the Biden administration has already suggested that, as part of its supply chain resilience initiative, it could launch a new Section 232 investigation of another product with “defense and civilian industrial uses” – neodymium magnets.
Toomey’s role
As Sen. Pat Toomey, who had pressed the hardest for release of the report, said on July 6th upon its release, “It was wholly unacceptable that the previous administration defied federal law and refused to release this report. I commend Secretary Raimondo and the Biden administration for making this report public. A quick glance confirms what we expected: the justification for these tariffs was so entirely unfounded that even the authors were too embarrassed to let it see the light of day.”
Under US law, Section 232 reports have to be released to Congress and, except for sections with proprietary information, to the public as well. Trump’s Justice Department justified withholding 232 reports by claiming executive privilege. It took a Freedom of Information Act (FOIA) request to force the auto report’s release.
Importantly, there was enough bipartisan anger in Congress over the withholding of the report that a provision requiring its release was included in the FY20 Omnibus Appropriations Bill. Yet President Trump, defying the law, continued to withhold the report, as well as other less controversial Section 232 reports that he had ordered but not acted on.
L.C. reports on trade matters for business as well as Founders Broadsheet.
7/19/2021: Erroneous issue date corrected.
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